2016 revenue slightly miss expectation

Kuaijishan Shaoxing Wine announced 2016 results: revenue wasRmb1.05bn, up 14.6% YoY; net profit attributable toshareholders was Rmb0.14bn, up 24.5% YoY, or Rmb0.33 pershare. Revenue slightly missed expectation on a limitedcontribution from overseas markets. Gross margin slipped 1pptto 43.19%, mainly due to rising raw material costs and theconsolidation of lower GM firms Wuzhanmao and Tangsong.

Trends to watch

Visible trend of consumption upgrading in Zhejiang – toexplore markets outside of Zhejiang

Consolidation may boost 2017 revenue but drag down grossmargin

Plant demolition and goodwill are worth attention

Earnings forecast

We lower our 2017/18e revenue forecasts 6.9%/8.6% toRmb1.249bn/Rmb1.385bn and cut our net profit forecasts 8.9%/7.4% to Rmb184mn/Rmb220mn. We lower our 2017earnings forecast 9% from Rmb0.41 to Rmb0.37 pershare and our 2018 forecast 7% from Rmb0.48 toRmb0.44 per share.

Valuation and recommendation

The stock is trading at 2.3x 2017e P/B, or 5x 2018e P/S. Wemaintain our BUY rating, but lower our TP 6.67% toRmb18.20, implying 30.37% upside room from the currentprice.

Risks

Sales could disappoint if Kuaijishan fails to promote its brandeffectively outside Zhejiang.